Recently, there has been much ado about various short sellers taking significant losses in stocks such as Netflix (NFLX) and The St. Joe Company (JOE). Short selling plays an important role in all markets, not only by allowing market participants to hedge long positions, but also by keeping the bulls honest and helping to provide the proverbial “wall of worry” for the market to climb. Short sellers often get a bad reputation because, by definition, the majority of market participants are long and short sellers are thought of as the enemy.
I can’t count the number of times in recent months that I have seen traders on StockTwits tweet how “the shorts are getting murdered” or “you’d have to have a death wish to short XYZ stock”. During a raging bull market the short sellers are the enemy, they are the Darth Vaders of the market, and as the market surges higher short sellers become more of an endangered species. In fact, during a strong market uptrend the longs should be thanking short sellers for providing them with extra profits. As famed short seller Doug Kass of Seabreeze Partners has stated on numerous occasions, “valuation alone is not reason enough for shorting a stock”. Mr. Kass also does not short stocks with short interest ratios above 10% due to the much higher likelihood of a so called short squeeze. One doesn’t have to look far to find some examples of brutal short
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